The UK Parliamentary Commission on Banking Standards has called for regulators to have the “reserve power” to enforce a separation of banks, after publishing a report on government plans for financial regulation.

The panel has taken a tougher approach to bank reform than Sir John Vickers’ Independent Commission on Banking, which called for a ring-fence of banks’ retail operations from their investment banking arms.

The government published draft legislation to implement Vickers’ ring-fence proposals in October as part of a banking reform bill, and will vote to enact the measures in the early half of the coming year.

However, Andrew Tyrie, chairman of the Parliamentary Commission on Banking Standards, said the current measures “fall well short of what is required”.

He said: “That’s why we recommend electrification. The legislation needs to set out a reserve power for separation; the regulator needs to know he can use it.”

The Banking Commission had taken evidence from a raft of regulators, bankers and experts in recent months. Here we highlight some of the evidence to the commission, which was published in today’s report and previous FN coverage.

• Sir John Vickers

The architect of the ring-fence told the commission he was optimistic about its prospects for succeeding, although added that total separation was not out of the question.

He said: “If the industry turned out to be unreformable, and I am not so pessimistic as to think that, of course it is possible that total separation would turn out in due course to be the better step to take.”

He said that regulators ought to be able to preserve the integrity of the ring-fence against lobbying from banks.

He said:”I believe that the regulatory institutions and the legislature would be alert and robust enough to resist that [lobbying]. It is a very welcome thing that our proposals, at least in broad terms, have not only the support of the Government but cross-party support. That, too, is helpful in resistance to creep.”

The Chancellor of the Exchequer staunchly defended Vickers’ recommendations and warned against an “aggressive” break-up of the UK banks.

He said: “I would be very wary of unpicking a consensus that has been arrived at... We have spent two years getting to this point.”

He added: “We are now on the verge of introducing groundbreaking legislation-in which, by the way, the rest of the world is increasingly interested. I don’t think this is the point to say, ‘You know what, let’s go back to square one.’”

The outgoing Bank of England Governor reminded the committee that he had long been in favour of full separation of banks’ retail and investment divisions in the wake of the financial crisis.

He said: “I have made no secret of the fact, and I have spoken about it for five years, that I have always felt that total separation was the right way ultimately to go.”

However, he also urged the government to pursue Vickers before considering such a measure again in future: “I really do not want the last five years of effort to go to waste through the whole issue being kicked into the long grass by not implementing Vickers.”

He added: “I would like it set up in such a way that whatever came out of this there is a mechanism for reviewing - an automatic mechanism for reviewing the ring-fence and whether it's working - which can't be dodged or pushed into the long grass."

The former chairman of the US Federal Reserve and architect of the US Volcker Rule limiting proprietary trading at banks, said that the Vickers ring-fence would be “permeable” and could fail over time.

He said: “We’ve had different subsidiaries of banking organisations with prohibitions on how to interact with the bank, rules to ensure arms length transactions, and in my experience they tend to break down over time because pressures from the institution itself.”

He added: “If you enforced a ring-fence right now, it would be effective. I would argue you might not have to go that far…but there are holes in the fence. Over time, the holes are likely to get bigger rather than smaller, that is what happened with Glass-Steagall.”

The Bank of England financial policy committee member said that Vickers was a “step in the right direction” but that it ought to precede tougher separation.

He said: “To me, however, it is only a step in the journey because I think a modern Glass-Steagall will ultimately see total separation... I think that we are on a journey, and Vickers is a good path for us to follow.”

He also said that, without a tougher split, a more client-focused culture in the industry could not be achieved.

He said: “If a bank is allowed to do proprietary trading, or proprietary investments, you will not have a culture that you like, because de facto, you are then competing with the client, and it is a heck of a lot easier to do proprietary work than it is to do client service. The best and the brightest within the institution will gravitate to the proprietary activity and we will end up where we have ended up, which is with bankers who sometimes do not understand right from wrong, or at least a pool of them.”

He said: “There is a stronger case for a broader ring-fence. I think that grey area [permitted activities] carries the risk of flexibility. Banks like the notion of flexibility to fit their business model [but] previous ring-fences, as Volcker has said, have proved too permeable. Personally I think there is a case for whether mandated activities in the ring-fence should be broader.”

• Erkki Liikanen

The Finnish central bank governor published proposals to reform the European banking sector in September, and had called for similar ring-fencing measures to Sir John Vickers.

He told the commission that universal banks had “served the European economy well when they have acted with prudence”.

He also urged the UK to be “compatible” with European banking reform: “It’s important to have some basic common solution that would be helpful for us. If you have some differences then it’s important that they don’t at least have a negative impact for the financial market.”